“I can’t say that the bookkeeping is getting better, but there is no doubt that the controls over the bookkeeping is getting better and companies will be run better and that will be a very good thing for investors, employees and customers.”Bob Broda, Visage Solutions.

RESEARCH TRIANGLE PARK — Would you be at all surprised if corporate executives at many public companies are on permanent “scandal watch” these days?

The plague of Enron and other corporate scandals is generating a wealth of lawsuits, SEC reviews, and a bonanza for bookkeepers. With that federal whopper legislation Sarbanes-Oxley on the books, I’m surprised corporate executives still talk to the press.

How many entrepreneurs now really want to take their companies public if the endless scrutiny means a never-ending nightmare? Now please don’t get me wrong. I’m not saying all execs are innocent.

But the best, most honest “suit” goes to work every day now with a bull’s-eye on his back. One mistake — and it is lawsuit time.

Given what has unfolded recently at Nortel, Red Hat and AAI Pharma — just to name three firms with huge North Carolina connections — I checked in with one of the better-known Sarbanes-Oxley experts around to get his view on what’s happening.

“On one hand, you could say that there may me too much zeal by the legal community,” said Bob Broda, managing partner of Visage Solutions. “On the other hand, one could say that there was simply too much schanagans going on in Corporate America.

“The interesting aspect of Sarbanes-Oxley is the governments has made compliance market driven. The recent sell-off of Red Hat stock suggests that there will be negative reaction to any type of changes requested by their auditors.

“Lets face it, their suggestion was how revenue was recognized. That may be an issue with a very large percentage of software companies. I wonder what the reaction was if they reported a material weakness?”

Too much zeal?

In a series of questions via e-mail, I sent to Bob the partial text of Red Hat’s SEC response filed on Monday when the company said the lawsuits stacking up against it would cost money and distract executives.

“I am really glad to see that Red Hat’s recent restatement of earnings actually increased profits for the quarter,” Broda responded. “This may be a case of too much zeal.”

I asked Broda to put in a national context the tougher financial standard saga, and he warned that we haven’t seen the end of the story.

“We are probably going to see much more restatements before the end of the year,” he said. “Most companies have documented their internal controls and are now preparing to test those controls and have the auditors attest to their effectiveness. Since this is the first time companies have to do this and the fact that the auditors are just getting their marching orders from the PCAOB (Public Company Accounting Oversight Board), there is going to be plenty of problems and inconsistencies identified.”

A ‘profound’ effect

While the specifics of the Red Hat, Nortel and AAI Pharma may differ, I asked if bookkeeping woes indicate Sarbanes Oxley and increased government regulatory oversight are having dramatic impacts on public companies.

“Sarbanes is having a profound impact on corporate America,” he responded. “They are spending more money than they ever imagined on compliance, and it’s probably not over.

“Most companies faced the challenge as ‘do the minimum to comply’, a very large percentage of those companies will try to address those issues again next year and try to improve those processes. As they go through attestment with their external auditors, there potentially will be some substantial rework required to ensure they meet their obligation of a fair impartial assessment.

“I can’t say that the bookkeeping is getting better,” he added, “but there is no doubt that the controls over the bookkeeping is getting better and companies will be run better and that will be a very good thing for investors, employees and customers.”

The fact that so many lawsuits are filed so quickly when something seems to go awry at a public firm led to the question: Do the new regulations and oversight make companies more vulnerable?
“There is certainly more risk of lawsuits with Sarbanes-Oxley,” Broda said. “Executives were always responsible for the running of their companies.

“I think what Sarbanes really did was remind everyone. I don’t think it necessarily increased companies liability, but it did make the CEO, CFO and board members personally liable. Media exposure to cases such as Enron have unfortunately made the corporate executives more visible and accountable to the small investor.”

Pozen is a somewhat different case. It faces a series of legal challenges related to troubles with drug candidates. I asked Broda if pharmaceutical firms of public firms at more risk if executives are positive about prospective drugs that end up failing.

“If executives are positive about any of their businesses failing, I would wonder about their competency or the way there are being compensated,” Broda said. “However, sometimes it’s worth taking the chance that the situation can be turned around. If an executive takes a valid business risk, does it warrant being sued by the investors?”

End game: Better return for investors

That’s a huge question. After all, risk taking is essential, especially in entrepreneurial endeavors. If all the regulation ends up making executives afraid, then our entire economy will suffer.

Finally, I asked him about the Red Hat situation and its discussion with its auditors about how to handle certain revenues. Does the fact that Red Hat and its auditor were reviewing reports stands as proof that Sarbanes Oxley and SEC guidelines are working by creating more questions and challenges between the bookkeepers and their clients?

“I’m convinced of it,” he said.

But is Sarbanes Oxley plus federal oversight and lawsuits becoming such a witches’ brew that some firms, executives and board members will say “Enough of this”, give up and go private, or
find another line of work?

“There may be some that give up and there may be others where it makes more sense that the company becomes private,” Broda explained. “I hope that it forces the ones who were guilty look for a different line of work.

“For those who had strong moral convictions, they will thrive in this new environment and with adoption of the mandated changes, build a more effective business and return value to the investor.”

Visage Solutions: www.visagesolutions.com